Texas Tax Deed Investing
In Texas, tax-delinquent properties are sold for back taxes at a public auction. The distinct advantages that Texas law offers for Real Estate Investors are below.
Penalty Return Amount rates of 25%-50% provide the highest profits if a redemption occurs. If the delinquent taxpayer wants to redeem their property after your purchase at the tax sale they must pay you a 25% penalty return in addition to your costs if the redemption occurs during the first year of the redemption period. If the redemption occurs in the second year, the penalty return is 50%.
The Penalty Return Amounts are applicable anytime during the year – they are not pro-rated. For example, if the redemption occurs in the first month of the redemption period, the investor would get the full 25% penalty return plus his cost even though it was only owned for one month. If it occurred in the 13th month, the investor would receive 50% of his cost plus keep any rent collected.
The Penalty Return Amount is calculated based on the price the investor paid at the auction, not on the taxes owed. If the taxes owed were $8,000 but the property was sold for $20,000, the 25% (or 50%) would be paid on the $20,000, equaling $25,000 (or $30,000 in the second year).
Additional fees and costs are included in the amount required for the delinquent taxpayer to redeem. According to Chapter 34.21 (b) of the Texas Tax Code:
“The owner of real property sold at a tax sale may redeem the property...by paying the purchaser the amount the purchaser bid on the property, the amount of the deed recording fee, the amount paid by the purchaser as taxes, penalties, interests, and costs on the property, the amount paid to preserve, maintain and safe keep the property and the penalty return amount.”
The Redemption Period can be 180 days or 2 years. Prior to 1993, all redemptions had a 2 year period. Legislation changed everything except Homestead and Agricultural properties to 180 days. But even they require qualification based on the status at the time the delinquent tax lawsuit was filed.
Texas statutes allow counties to determine how often to hold tax sales. According to Texas law, if a county wishes to have a tax sale, it must take place on the first Tuesday of the month. This can provide the investor with numerous opportunities to invest in the Texas system every month during the year, instead of just once a year, as in many other states.
Texas has a vast number of counties—254, to be exact. Not every county will have monthly tax sales. Generally, only the larger counties like Harris County (Houston) will hold sales every month. However, the smaller counties can offer less competition, due to the infrequency of tax sales and the quantity offered.
Under Texas law, counties may choose to sell unsold tax sale properties at a later sale or offer them for sale after the normal tax sale auction. These are generally called "strike off" properties. Depending on how much time has elapsed since the original tax sale, these properties will have a shorter redemption period since the “strike off” conveys the property to the taxing entities which start the clock on the redemption period.
The Texas tax lien is referred to as a "super priority" lien. This means that it generally has priority over nearly every other type of lien, debt, claim or charge that may be attached to a property. Thus the purchaser (if proper research has been conducted) can in most cases obtain the property clear of most liens and encumbrances.
Texas law allows the successful bidder at the tax sale to collect any rents from the property immediately after the tax sale. If a property is occupied, the investor can choose to leave them in or evict them. If a suitable tenant is in the dwelling house, this can represent a significant source of cash flow.